1. DEPRECIATION ACCOUNTING Depreciation is an expenses and not a loss Depreciation is reduction in the value of fixed assets due to use, wear and tear, obsolescence and changes in the market conditions. Necessity of charging depreciation:  Calculation of true cost of production.  Replacement of fixed assets at the end of its useful life.  Determining the true profit or loss.  Reflecting the true and fair view of financial position in the Balance Sheet

2. Factors considered for charging depreciation in the accounts: Original cost of the Fixed asset. The estimated scrap value at the end of its useful life The useful life of the asset. Methods of computation of depreciation: There are several methods of computing depreciation of which the following are relevant for our discussion- Straight Line method Diminishing Balance method Depletion method

3. Methods of accounting for depreciation: Basically two methods of accounting depreciation are recognised- Charging depreciation in the asset account itself Charging depreciation in a separate provision account.

4. JOURNAL ENTRIES: For purchasing fixed assets- Fixed Asset A/C ----------------------------------Dr To Cash/Bank/ Creditors A/C For expenses incurred on installation of asset- Assets A/C-----------------------------------------Dr To Cash/Bank a/C For Charging annual depreciation- Depreciation A/C --------------------------------Dr To Asset A/C

5. For sale of assets- Bank/Cash A/C -----------------------------------Dr To Fixed Asset A/C For loss on sale of asset- P/L A/C --------------------------------------------Dr To Asset A/C For profit on sale pass reverse entry.